Aereo and Napster: Lessons in Licensing

As is increasingly reported, there is a battle raging in today’s marketplace between companies with new technology platforms and content creators from the entertainment community. On the one hand, are computer science engineers and programmers developing new and better code, creating more complex algorithms, and building ever expanding server farms at a breakneck pace, all to give the consumer cheaper, faster, and more mobile access to music, movies and television. On the other hand, are musicians, writers, movie and television producers and broadcasters, all trying to monetize their original works of authorship and protect their distribution rights. To date, the courts have been the great equalizer, ensuring that new technologies, no matter how powerful, innovative or seamless, will not be permitted to undermine the fundamental copyright protections afforded entertainment creators and companies. And a recent decision by the U.S. Supreme Court in American Broadcasting Cos., Inc. v. Aereo, Inc. is no exception.

Aereo sold a service that allowed subscribers to intercept and watch television programs over the Internet at about the same time the programs were being broadcast over the airwaves from terrestrial antennas owned by ABC, Disney, CBS, NBC, Universal, Telemundo and others. Here’s how Aereo’s service worked: A subscriber would go to Aereo’s website, select a show currently airing, and Aereo’s system, which consisted of thousands of small antennas housed in a warehouse, would translate the broadcast signals into data that could be streamed over the web to its subscribers just a few seconds behind the actual broadcast. Pretty cool technology, right? Just not legal.

The Copyright Act of 1976 gives a copyright owner the “exclusive right” to “perform” the copyrighted work “publicly.” 17 U.S.C. Sec. 106(4). The Act’s Transmit Clause defines an “exclusive right” as the right to “transmit or otherwise communicate a performance of the copyrighted work to the public, by means of any device or process.” 17 U.S.C. Sec. 101. In Aereo, the Court found that Aereo’s technology platform did “perform” copyrighted material “publicly” and, therefore, infringed on the “exclusive rights” of the producers and broadcasters to transmit such programming to the public. Despite the fact that Aereo’s technology was revolutionary in delivering a service to consumers, without a license agreement from the studios and networks who actually owned the content and distribution rights to such programming, Aereo was still committing plain old copyright infringement.

And we should have known that the Court would come to this conclusion. Over the last fifteen years, Courts have consistently resolved similar fights between emerging-growth technology companies and the entertainment industry in the same manner. In 2001, for example, the entire music industry (Universal Music, Warner Music, and Sony Music, among others) sued and destroyed 18-year old computer science student, Shawn Fanning, and his peer-to-peer music file-sharing service known as Napster. Napster provided a service that allowed users to look at a menu of songs from their laptop and easily access and download compressed digital music files from other users’ machines all over the web. Again, a really cool technology—just not legal.

In the Napster case, the Ninth Circuit Court of Appeals found that Napster’s users were likely committing direct infringement of the record companies’ and music publishers’ copyrights by downloading songs for free from their fellow users’ hard drives. Despite pervasive infringement by its users, Napster claimed that it could not be held liable for such misconduct under the Fair Use Doctrine, which is codified under Section 107 of the Copyright Act of 1976. There are four factors to be considered when engaging in a fair use analysis: (1) The purpose and character of the use; (2) The nature of the copyrighted work; (3) The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) The effect of the accused use on the potential market for or value of the copyrighted work. Napster’s users engaged in file sharing to avoid paying for music. They didn’t merely “sample” these songs to determine whether or not they wanted to purchase them; rather, they downloaded songs in their entirety knowing full well they would never have to pay for them. And, finally, the effect of Napster’s technology on the market and value of the songs that were shared by their users was nothing shy of devastating: Buy a CD for $17? Or download your favorite songs from that CD for free, instantaneously, from the comfort of your home? Which would you choose?

Applying these “fair use” factors to Napster’s technology platform, it is relatively easy to see why the fair use defense did not hold up. And although the Aereo Court did not apply a fair use analysis, if it had, the conclusion would have been the same. The purpose of Aereo’s service was to intercept programs from the system owned and controlled by the biggest players in the entertainment industry, and deliver it to Aereo subscribers for a fee through the Aereo network. Had the Aereo system been permitted to remain in place without paying any license fees to those who had created and funded the development of that content and owned the copyrights therein, the business model of the entire entertainment community would have been decimated.

Ultimately, the Ninth Circuit held that Napster was liable for contributory and vicarious copyright infringement because it enabled and induced its users to engage in copyright infringement.In Aereo, the U.S. Supreme Court found that Aereo was engaged in copyright infringement by using its technology to publicly perform and transmit shows in which Aereo had no rights.Even though the technology platforms and business models of Napster and Aereo may have been different, when brought before the courts the outcome was the same:In the absence of permission from the content creators and those authorized to commercially distribute such content, a technology company—no matter how powerful, innovative, and seamless their platform—who sells access to that content without a license is liable for copyright infringement.In short, I believe the formula for achieving legal, profitable and sustainable convergence of new technologies with content created and owned by the entertainment community is a relatively simple one—a license.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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